News

18 Jul

Commercial Landlord Responsibilities – What You Need to Know Before Investing

What are the differences between commercial property and residential property?

Investing in commercial property is an effective means of diversifying your investment portfolio, bypassing the high upfront costs, short leases and uncertainty associated with investing in residential property.

Commercial properties fit into one of three main categories:

Offices – spaces designed specifically for businesses, offices can be as a diverse as converted residential buildings and skyscrapers to purpose built office buildings

Commercial property is an attractive prospect for investors for a variety of reasons:

Commercial property investors in the UK benefit from long leases – generally between 8-15 years compared to six months to a year in residential properties. The guaranteed income of the lease means that commercial property represents a more stable investment

Due to the increased stability of commercial investments – with business tenants typically less likely to default on rental payments than residential tenants – lower interest rates are applicable

Prospective investors can enter the property market in a variety of ways:

Direct investment – this approach involves purchasing the entirety or a share of a specific commercial property, such as a high street shop. This is advantageous because it is a low-risk and low management option, but purchasing an entire property is rarely feasible for fledgling property investors

Direct commercial property (also known as ‘bricks and mortar’) funds – this involves investing in a portfolio of commercial properties that form a collective investment scheme, such as a unit trust. This has the advantage of making large commercial properties a feasible investment option for small investors as well as reducing the risk of purchasing a single property

Indirect property funds – this option involves investment in the shares of property companies. These possess high liquidity in comparison with direct investments and do not require high upfront costs

What should be considered before investing?

Profitable commercial investments

The economy has been forecast to grow by at least 1.5% both this year and in 2019 and the nervousness regarding UK investments since the Brexit vote has created a number of commercial investment opportunities for the entrepreneurial.

One of the main objectives of the upcomingCrossrail networkis to provide improved travel connections between London’s business and commercial districts.

The value of commercial property around London’s Crossrail stations is expected to soar as a result of an extra 1.5 million people who will be within commuting distance of the capital, making property in these areas a viable investment.

Crossrail stations include:

Paddington

Bond Street

Tottenham Court Road

Farringdon

Liverpool Street

Whitechapel

Canary Wharf

Custom House

Woolwich

Abbey Wood

Although the rising house prices in the commuter belt provide the most obvious benefits to residential investors, those looking to invest in commercial or semi-commercial property will also find many opportunities to profit.

The launch of Crossrail has also created commercial property investment opportunities across the commuter belt, with towns such as Brentwood and Slough seeing steadily rising house prices that predict an excellent return on investment.

Stevenage is already well-connected with a direct line to King’s Cross and investment value reflects this with average house prices rising by nearly 60% over the past ten years – a trend which is expected to be reflected in commercial property prices.

The extension of the Great Northern railway line, which will connect it to the Crossrail network at Farringdon, only serves to increase the town’s desirability to investors.

The retail sector also presents a variety of appealing investment choices for investors of all sizes and budgets. The movement towards online retail has, surprisingly, served to invigorate two very different kinds of commercial property opportunity. It is only logical that it has raised the demand for retail warehouse space in order to facilitate online shopping and the value of this type of investment sees no sign of decreasing.

Despite a spate of recent high street store closure announcements by brands as large as Marks & Spencer, Next and New Look, the ownership and shares of flagship stores have increased in value.

It has been speculated that this is due to an increased need for a physical store in which to showcase a brand’s values against a backdrop of internet shopping. Purchasing a flagship on Oxford Street or Tottenham Court Road may be beyond the financial capability of most investors, however shares in such destinations are rising in value.

Potential commercial investment pitfalls

It is inadvisable to invest in a commercial property that requires extensive repairs as your first purchase. Minor cosmetic updates are fine and should not be excessively costly, but if you intend to buy a run-down commercial property at a low market value, fully renovate it and sell it for a profit you will be competing with experienced property developers.

Even if you intend to retain the property in your portfolio after renovating it, the building costs of the project will likely be too high to represent a good overall investment.

Purchasing commercial property that is located in an area with which you are not familiar may also prove to be problematic. Remoteproperty managementrepresents a risk because your lack of expertise in the area in which your property is situated can be very costly.

Purchasing commercial property in another country – especially by direct investment – is an even more risky strategy, so as an investor it’s advisable to consider areas which are familiar to you.

What are the Commercial Property Landlord Responsibilities?

Once you have invested in a commercial property, you are responsible for upholding vital health and safety standards to ensure the safety of your tenants and their customers.

As a commercial property landlord, you are also responsible for adhering to industry regulations regarding fire, asbestos and energy performance.

Fire risk assessments in commercial property

Fire risk assessments on commercial properties must:

Be reviewed regularly

Be legally recorded if the premises employs more than four people

Be documented if the property is licensed or if the fire brigade has issued an alterations notice

Have their findings recorded along with any actions that may need to be addressed

Fire alarm regulations for commercial buildings stipulate that all premises must have a fire detection system which must be tested weekly and serviced twice annually. The alarm should be audible to everyone in the building and there must be a call point on every floor.

If the commercial property is high-risk – such as a restaurant – an automatic fire alert system should be used. Lower-risk properties must have manual systems installed by law.

Asbestos management in commercial property

Unless the contract or lease specifically states otherwise, as a landlord of a commercial property you are ultimately responsible for ensuring that any asbestos on the property presents no risk to those living or working in or around it.

Correct asbestos risk management is vital. Not only does exposure to airborne asbestos particles present a very real danger, the penalties for irresponsibilities are high:

A fine of up to £20,000

Up to 12 months in prison

In extreme cases of failing to deal with asbestos correctly, landlords can face unlimited fines, up to two years in prison, or both.

What does an asbestos survey involve?

Check the lease or contract to determine who is responsible for asbestos within the property

Employ an accredited commercial property surveyor to undertake an asbestos survey of the property. Common places to look for asbestos in your workspace include:

Insulation

Cement

Ceiling tiles

Insulation coatings

Textured coatings

Have the findings – if any – analysed and record the results

Undertake a health and safety risk assessment of the property

Arrange the safe removal of any asbestos judged too hazardous to remain within the property

Continue to monitor any remaining sources of asbestos and ensure that they are in good condition

Ensure that any tenants know about the asbestos and take all necessary precautions whilst in the property

In the case of further building work, ensure that anyone working on the site is fully aware of all the relevant information regarding asbestos

If you are the owner of a commercial property that may stand empty for a long period of time such as a warehouse, the property needs to be surveyed for asbestos regardless of whether it is in use or it is vacant.

How much does it cost to remove asbestos?

The cost of removing asbestos from a commercial property varies depending on the substance containing the asbestos and the degree of treatment necessary. However, removal is an wise investment as the presence of asbestos (even encapsulated) may decrease the value of a property.

If you are already aware of a potential source of asbestos within a commercial property, a basic analysis of the material will cost around £50. A full survey to find any potential sources of asbestos within the premises will usually cost at least £200, possibly more if the building is very large or there are factors such as space restrictions to consider.

Generally speaking, the removal of asbestos materials cost around £50 per square metre if the substance is concrete, coating or tiles. Asbestos removal companies often charge flat fees for smaller, self-contained objects that can be removed in one go, such as water tanks.

The cost of asbestos removal from a commercial property also depends on the area in which you live. Several councils offer asbestos removal services at greatly reduced rates, or even for free. Get in touch with yourlocal councilin order to find out what their policies are.

Asbestos encapsulation

Removing asbestos from a commercial property is not always necessary. It may be sufficient to seal the asbestos in order to prevent the release of harmful airborne particles – a process known as encapsulation. This typically costs around £8 per square metre, a far less expensive option than outright removal.

It is also worth considering the costs of restoring any gaps the asbestos removal may have left in the property – removal of large amounts of asbestos material might call for substantial redecoration afterwards.

Electrical certificates and energy performance certificates (EPCs)

Commercial properties require valid electrical safety certificates and energy performance certificates by law. As the landlord, you are responsible for obtaining these certificates and ensuring they are valid.

How long does an EPC last?

A commercial property is required to have a valid EPC by law, with a failure to do so resulting in a fine of up to £5,000.

Electrical safety in rented business premises

Unless specified otherwise in the lease, the responsibility of ensuring the electrical safety of a commercial property lies with the landlord. You will require a certificate in order to prove the premises has passed the relevant electrical safety compliance checks.

How much does a landlord electrical safety certificate cost?

For a commercial landlord, the cost of an electrical safety certificate will depend on the size of the property, ranging from £150 to £1,080.

Management of maintenance and repairs

Most commercial property leases are designated as ‘Fully Repairing and Insuring’ (FRI), meaning that the majority of responsibility for commercial property maintenance lies with the tenant. However, the landlord is usually responsible for maintaining the exterior of the building and any costs pertaining to safety.

While the tenant may be financially liable for any dilapidations to the property, it is most often the responsibility of the landlord to organise the necessary repairs. For this reason, it’s advisable to survey the condition of the building when you’re planning to invest in a property and before each new tenant takes occupancy.

Commercial property insurance requirements

Commercial landlords are advised to secure property insurance in order to provide financial safety in the event of damage to or destruction of the property.

Bespoke commercial insurance packages can be tailored to your individual needs and may provide:

Structural cover in case of damage sustained as a result of burglary or natural disasters such as fires, floods or storms

Terrorism cover in case of damage caused by an attack or act of war

Loss of rent cover in case of damage to the property which prevents the tenant’s safe occupation of the property

Commercial tenant services

Once you’ve invested in a commercial property and sourced suitable tenants to occupy the premises, you also need to be aware of the responsibilities you hold to any such tenants as the landlord of the property, including:

Rent reviews

Lease renewals

Lease surrenders

Lease assignments

Rent collection

Chasing rental arrears

Investing in commercial property is an effective means of building a property portfolio, providing you do your research before you invest in a property and you are aware of the responsibilities of owning and managing a commercial property.

Get in touch

If you'd like to find out how you can benefit from our expert commercial property management service or you'd like to find out more about the commercial property services we offer, please just get in touch.

TESTIMONIALS

Margaret and I were in Newark today and she wanted me to let you know how fantastic the old Brittania Building Society building is looking now – very smart and occupied by the Skipton Building Society.

Seeing the the building reminded her how much she appreciates all the work you have done over the years for the Trusts’ properties and thanks you most sincerely.

Margaret and Joe

I want to thank you and Martin Slowe Chartered Surveyors for being excellent landlords giving my business a chance to grow. Without your attention to our needs and making sure that our facility was always functioning properly we would not have been able to achieve our success.

Elliot Laurence Sales & Lettings

Martin Slowe Property Services have taken care of everything for me. Their advice has been invaluable to my company and they have taken any stress away by giving the best advice at the most appropriate time. We look forward to working with them for many years to come.